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Energy Law Exchange

April 9, 2018

European Court of Justice Rules that Arbitration Agreement in Intra-EU Bilateral Investment Treaty Violates EU law Calling Into Question the Arbitrability of Energy Disputes Between EU Member States


In a ruling that has sent shockwaves across Europe, the European Union’s (EU) highest court, the European Court of Justice (ECJ), has struck down an arbitration agreement contained within a bilateral investment treaty (BIT) between two EU member states, the Netherlands and Slovakia. Whilst the ramifications of this decision are yet to be fully realised, it is clear that a great deal of uncertainty arises as to its impact, not only on the 200 or so other intra-EU BITs currently in force, but also on multilateral investment treaties involving the EU and its member states, most notably the Energy Charter Treaty (ECT), under which substantial disputes have arisen in recent years, particularly in the renewables sector.

Background

The case of Slovak Republic v Achmea BV (Case C-284/16) relates to Slovakia’s attempts to have an investment treaty arbitration award set aside at the seat, Frankfurt, Germany. The arbitration was initiated in 2008 by Netherlands company, Achmea, under the UNCITRAL rules pursuant to the 1991 Netherlands/Slovakia BIT.  In 2012, the arbitral tribunal, comprising Vaughan Lowe QC (chair), VV Veeder QC and Albert Jan van den Berg, awarded Achmea €22 million in compensation for Slovakia’s reversal of liberalisation measures in the private health insurance market and the prevention of the distribution of profits to shareholders (which Slovakia, inter alia, argued involved the actual or potential interpretation and application of EU law, principally freedom of establishment and movement of capital).

In the arbitration Slovakia sought to argue that the arbitral tribunal lacked jurisdiction because it was not entitled to determine matters of EU law, which by reference to the laws of Slovakia in Article 8 of the BIT formed part of the governing law. Article 8 of the BIT, inter alia, provided that the arbitral tribunal shall decide the dispute in accordance with “the law in force of the Contracting Party Concerned [i.e. Slovakian law, which as an EU member state, incorporates EU law] and “other relevant agreements between the Contracting Parties [i.e., the EU treaties].”  The arbitral tribunal, however, rejected the argument that Slovakia’s accession to the EU in 2004 rendered the BIT’s arbitration mechanism incompatible with EU law on the basis that the ECJ alone has jurisdiction to determine issues or potential issues involving the interpretation and application of EU law. The arbitral tribunal’s decision followed a long line of arbitral jurisprudence which has unanimously rejected the so called “intra-EU” objection.

Slovakia’s challenge to the final award was rejected by the High Regional Court of Frankfurt in 2014. Slovakia appealed to the German Federal Court of Justice (Germany’s highest civil court) on a point of law, namely the incompatibility with EU law argument that the tribunal had already rejected. Whilst the German court expressed doubt as to the incompatibility, it referred the question to the ECJ, bearing in mind the potential impact on the 200 or so BITs in force between EU member states.

The EU (in particular the Commission) has consistently taken the position – often in amicus curiae briefs in active arbitrations – that arbitration agreements in treaties between EU member states are invalid. Ten EU member states submitted observations in support of Slovakia, including Czech Republic, Estonia, Greece, Italy, Spain, Cyprus, Latvia, Hungary, Poland and Romania, all frequent respondents in investment arbitrations who have yet to terminate the majority of their intra-EU BITs. In contrast, Germany, France, the Netherlands, Austria and Finland contended that the arbitration mechanism in the applicable BIT and similar provisions in other intra-EU BITs were valid.

The ECJ decided in a judgment handed down on 6 March 2018 that the arbitration mechanism in the BIT has an adverse effect on the autonomy of EU law and that the Treaty on the Functioning of the European Union (TFEU) “must be interpreted as precluding a provision in an international agreement concluded between Member States, such as Article 8 of the BIT, under which an investor from one of those Member States may, in the event of a dispute concerning investments in the other Member State, bring proceedings against the latter Member State before an arbitral tribunal whose jurisdiction that Member State has undertaken to accept.”

Impact of the Decision

Given the opposing views of EU member states, the ECJ’s decision is controversial, not least because it disregards the non-binding opinion of one of its advocates general, Melchoir Wathelet, who advised that the BIT’s arbitration clause did not violate EU law. It is too early to say what the full impact of the judgment will be on treaty arbitrations and awards. There is already no shortage of views from commentators, but there will be no certainty until arbitral tribunals and the domestic courts of the EU member states grapple with the decision.

On a strict reading of the judgment and its dipositive part, the ECJ has struck down only those BITs, like the 1991 Netherlands/Slovakia BIT, which contain an applicable law clause that incorporates EU law and where the dispute gives rise to an actual or potential question of EU law. Given a wider interpretation, however, the judgment could be relied on to advance an argument that all arbitration agreements in BITs between EU member states are invalid. This type of argument ought not succeed given that the ECJ stressed in its judgment that the specific wording of Article 8 of the BIT, namely its invocation of EU law within the applicable law, was a decisive factor.

An even bigger question is the extent, if any, to which the decision impacts multilateral investment treaties, the most prominent being the ECT. Based on the long line of arbitral awards in ECT cases which have unanimously rejected intra-EU objections and the fact that the Netherlands/Slovakia BIT’s applicable law incorporates EU law whereas Article 26 of the ECT does not, suggests that intra-EU arbitrations under the ECT fall outside the ECJ’s declaration of incompatibility with EU law. What the ruling clearly does not affect is disputes between EU and non-EU parties, under either bilateral or multi-lateral investment treaties.     

On a practical level, under the principle of Kompetenz-kompetenz, it will continue to be the case that arbitral tribunals determine their own jurisdiction, including whether this latest ruling of the ECJ applies in the given circumstances of cases before them, and if it does, to what extent they ought to apply it. In the case of the ECT, it is hard to see arbitral tribunals reversing the well-established trend of recent decisions, finding instead that because of the ECJ’s recent ruling they do not have jurisdiction in circumstances where before they did.     

Where matters become potentially more difficult is in relation to set aside proceedings and the recognition and enforcement of arbitral awards in the domestic courts of EU member states. Notwithstanding an arbitral tribunal’s positive determination on jurisdiction, the domestic courts of EU member states are bound by the ECJ’s decision, such that in applicable cases, they would arguably have to set aside awards and refuse to recognise and enforce them in their jurisdictions. Not only is this a live issue in the instant case, where the German Federal Court of Justice must now apply the ECJ’s ruling in the context of the German proceedings, but it is also arising in the context of the EU Commission’s recent decisions that payment of compensation under certain awards constitutes unlawful State aid. In Micula and others v Romania (ICSID Case No. ARB/05/20), for example, the English High Court has recently stayed enforcement of the award pending appeal of the EU Commission’s decision on State aid to the ECJ. The same issue arises in a number of the renewables cases brought against EU member states in recent years, including in particular Spain. The potential issues, of course, are less likely to cause difficulties when embarking on recognition and enforcement efforts outside of the EU, for example, in the United States (and even in the United Kingdom, post-Brexit).

Practical Considerations

Given the uncertainties, it is worth paying attention to certain practical points, the main one being the arbitration forum (if the treaty, as many do, provides an option). For example, ICSID awards – given the “self-contained” nature of annulment proceedings under the ICSID Convention – are more immune to interference from domestic and EU courts. In contrast, arbitrations under institutional rules, such as UNCITRAL, ICC, SCC, or ad hoc, where the seat of the arbitration is invariably in an EU member state, are less immune. Further, given London’s status as both a global financial and arbitration centre, the effect of the United Kingdom’s imminent exit from the EU is also worth bearing in mind when deciding under what rules, when and where to initiate an arbitration or to have an award recognised and enforced.